Firms Eye Liquidity in Wake of Covid-19|
June 25, 2020
1000 largest non-financial companies in the
U.S. slowed payments to suppliers slightly
in 2019 as they collected cash from
customers more slowly and held slightly more
inventory, causing overall working capital
performance to decline after several years
of improvement, according to the annual
survey of The Hackett Group. At the same
time, cash on hand and debt grew
dramatically, reaching record levels.
Improve Visibility – Ensure that the right key performance indicators are available for various business leaders, so that they can be used to drive action plans. Provide leaders with areal-time, intelligent dashboards that equip them with the insight they need.
Look Inhouse First – Before making changes to terms with suppliers and customers, look for quick win opportunities within the company, areas where process improvements can improve cash position. Promote a cash culture across the organization, and provide incentives for sales, procurement, commercial teams and others to optimize for cash. On receivables, make sure staff are not trading terms for revenue, remove obstacles to payment such as misbilling, and put clear escalation processes in place, up to and including having senior finance leaders call on overdue bills. Companies can also monitor customer payment performance, assess credit risk, and reprioritize activities by value. On payables, ensure that controls are in place to avoid early payments. Prepare for further disruptions, including an anticipated second wave of COVID-19. On inventory, encourage staff to consider cash impact when making decisions, collaborate cross-functionally to determine the organization’s appetite for risk and potential disruption, and develop effective contingency plans.
Focus on Modeling & Forecasting – Build the ability to do scenario modeling, integrated business planning, cash flow forecasting, risk assessments, and more to improve decision-making ability. Identify potential disruptors and refresh contingency plans as necessary.
Consider Customers & Suppliers – Monitor the financial health of customers and suppliers, and make accommodations where necessary, particularly in cases where losing a supplier might disrupt the company’s supply chain. Work with customers to provide incentives for payment. And optimize payment terms for suppliers, ensuring the right terms are being offered for each category of suppliers. Consider segmenting suppliers by risk and criticality to determine what approach to take, where to apply leverage, and where temporary support may be required.
Accelerate Technology Adoption and Digital Transformation – Digital transformation, including smart automation, robotic process automation, analytics, and more can significantly improve efficiency and effectiveness, significantly reducing transactional work, standardizing and streamlining processes, and providing more insight.
Revisit Service Delivery Models. Organizations need to increase flexibility, resilience and agility to understand and manage risks across the supply chain and their impact on cash flow. Diversification, where possible, will help mitigate the risk of further shocks to the end-to-end supply chain. Companies need to look at corporate and functional strategies, internal processes and organizational design to protect cash and build for the “next normal”.
The Hackett Group Working Capital Survey and Scorecard calculates working capital performance based on the latest publicly available annual financial statements of the 1,000 largest non-financial companies with headquarters in United States, sourced from FactSet/FactSet Fundamentals. The survey takes an industry-based approach to ranking companies according to the four key working capital metrics Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), Days Payables Outstanding (DPO) and Cash Conversion Cycle (CCC). For each industry the companies are ranked according to overall CCC days. Companies are classified according to the FactSet industry classification system, using data sourced from FactSet. For purposes of the survey and presenting the results we have grouped certain industries together. Historical comparisons within the survey are made on a like for like basis.